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Jul 02, 2007

Surviving the meltdown in the wholesale mortgage marketBlaise Dietzwholesale mortgage market, sub-prime demise, Creative Mortgage Lending, Southfield, Mich. The meltdown that happened in the mortgage market in 1998 was a category one tropical storm compared to the category five hurricane that is sweeping through the mortgage market now. Quite frankly, its ugly, and its going to get uglier, especially for the Detroit market. The reason it held off so long was because the markets were seeing double-digit rate appreciation and the equity growth in property value allowed borrowers who were in trouble to refinance again and again. Now, the appreciation rates are either flat or declining, even in the most popular areas. In addition, the largest amount of adjustable-rate mortgages ever written in the history of mortgage lending is resetting or adjusting, and when you have borrower payments increasing 20-40 percent, along with equity declining (or being flat at best), borrowers fail to make their payments and cannot refinance themselves out of trouble because there is not enough equity left in their properties. The meltdown in the mortgage market is chiefly caused by early payment default and loans that are stuck in warehouse lines. So how did we get to the state of affairs that we are in today? Last year, the big guys in the wholesale mortgage market were approving loans to 85 percent for borrowers who had 540 credit scores, no trade lines, five jobs in the last 24 months and botched verbal verifications of employment. The large companies were approving loans and speculating that investor financial institutions would buy them, even though they were outside the institutions guidelines. Simply put, these companies were not sure the loans would be purchased. It was clearly a loose way of doing business, which the wholesale market had gotten away with for a long time because of the massive liquidity in the industry. Today, account executives who chose to work for those companies are unemployed, and the company executives who chose to do business that way may face imprisonment at worst and lose all they have worked for at best. These companies are servicing billions of dollars of loans that were underwritten improperly and, therefore, could not be sold to institutions. When a lender sells bad loans, he has to service them, and when those loans are defaulting at a torrid pace, a company ends up in deep trouble. In addition, the warehouse line holders, who need to protect their investors, start to demand those same loans get off the warehouse line. Thats when everything implodes. The larger sub-prime originators will most likely go bankrupt, all because of greed. This is also the era of loss mitigation. Because of the massive number of buybacks on the books, lenders have to accept 70-80 cents on the dollar for their loans. The broken loan market is as busy as it has ever been in the mortgage business. So, is everything gloom and doom in the wholesale market? No. Many tremendous opportunities still exist for cautious, conservative third-party originators who were prescient enough to only write loans to the specific guidelines of the institutional investors and to only buy loans that they could sell. These companies are healthy and growing. The guidelines are based on risk modelinga projection of what a borrower can actually handle payment-wise. The guidelines are aggressive enough. When a lender ventures outside the guidelines, that lender is approving borrowers for loans that the risk models say will not work. Investors are reminding these few conservative wholesale lenders to stay the course. The appetite for quality mortgage paper as an investment is still there and will never go away. The people that are willing to buckle down now will be richly rewarded in the near future. Credit quality borrowersthose with a credit score of 620 or greaterwill also benefit from the larger supply of homes on the market. Because of defaults and repurchase demands, inventories will increase. There are a lot of healthy companies in the country that employ people who have housing needs, and the borrowers who have good credit are going to be able to purchase homes at 70-80 cents on the dollar because of the massive speculation that has been going on since 2003. A lot of the loans that are on default are from borrowers who had bad credit, put zero down and were not able to flip their non-owner-occupied properties. There is more than $1 trillion worth of loans that are resetting in 2007, and all need refinancing. There are tremendous opportunities for cautious, makes-sense lenders in Detroit and throughout the United States. Blaise Dietz is the co-CEO and president of Southfield, Mich.-based Creative Mortgage Lending. He may be reached at [email protected].
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